Parties to Negotiable Instruments

Parties to negotiable instruments are essential for ensuring their functionality and enforceability.

Negotiable instruments play a vital role in facilitating the flow of capital and trade. These instruments are legally recognised documents that promise the payment of a specific sum of money to the bearer or a designated payee.

In this article, we will delve into the meaning of negotiable instruments, the governing laws that regulate them and a detailed exploration of the various parties and their roles within this legal framework.

Meaning of Negotiable Instruments

Negotiable instruments are specialised financial documents that facilitate economic transactions. These instruments include promissory notes, bills of exchange and cheques. They promise to pay a certain sum of money to the bearer or a designated payee. What makes these instruments unique is their transferability.

They can be transferred from one party to another and the transferee acquires the same rights as the transferor. This feature makes negotiable instruments a convenient medium for conducting business transactions and financial dealings.

Governing Law

The regulation and legal framework for negotiable instruments are primarily governed by The Negotiable Instruments Act, 1881, in India. This act outlines the rules and provisions that apply to various negotiable instruments. These laws provide a structured legal framework for the creation, transfer and enforcement of negotiable instruments.

Parties to Negotiable Instruments

Maker/Drawer

The maker or drawer is the first party in a negotiable instrument. This party is responsible for creating the instrument and making a promise to pay a specific sum of money to the bearer or a designated payee.

For example, in the case of a promissory note, the person creating the note and promising to repay the amount is the maker. In the context of a bill of exchange, the drawer initiates the process by ordering the drawee to make a payment to the payee or a designated party.

Drawee

The drawee is the second party in a negotiable instrument and they are the party directed by the maker or drawer to make the payment.

The drawee is typically a financial institution, such as a bank, in the case of cheques. The drawee is obligated to honour the instrument and make the payment as specified.

Payee

The payee is the party whose name is mentioned on the negotiable instrument as the intended recipient of the payment.

This party has a legal right to receive the specified amount when the instrument is due. For instance, in a cheque, the person or entity to whom the cheque is payable is the payee.

Holder

A holder is any individual or entity who holds possession of the negotiable instrument. A person can become a holder by being the payee or by receiving the instrument through endorsement from the previous holder.

The holder has certain rights, including the right to demand payment and to negotiate the instrument further.

Holder in Due Course

A holder in due course is a person who, for consideration, becomes the possessor of a promissory note, bill of exchange or cheque. If the instrument is payable to the bearer, the holder in due course possesses it without any specific payee’s name.

If the instrument is payable to order, the holder in due course obtains it from the payee or an endorsee before the instrument’s maturity date, without any reason to believe that there are title defects.

Endorser

The endorser is the holder of the negotiable instrument who signs the back of the instrument, thus transferring their rights in the instrument to another party. This endorsement allows for the further negotiation or assignment of the instrument.

The endorser may sign their name only (endorsement in blank) or include specific instructions for payment to a designated person or to their order (endorsement in full).

Endorsee

The endorsee is the person specified by the endorser as the recipient of the payment. When the endorser adds instructions to pay the instrument’s amount to a particular person, that individual becomes the endorsee.

The endorsee holds the right to collect the payment specified in the instrument.

Endorsement

Endorsement refers to the act of signing the back of the negotiable instrument. An endorsement can be in blank, where the endorser signs their name only, making the instrument payable to the bearer.

Alternatively, it can be in full, including instructions on whom the payment should be made to, effectively naming the endorsee.

Drawee in the Case of Need

In certain situations, a negotiable instrument may specify a “drawee in case of need” in addition to the primary drawee.

This secondary person is intended to be used if the primary drawee fails to make the payment. It provides an alternative source for payment in case of complications or refusal by the primary drawee.

Acceptor for Honour

In exceptional circumstances, when the original drawer refuses to accept the bill or when a notary public demands better security, another party who is not originally liable for payment may accept the bill for the honour of any party liable on the bill.

This individual, known as the “acceptor for honour,” steps in to ensure that the payment is made, upholding the integrity of the negotiable instrument.

Conclusion

Parties to negotiable instruments include the maker or drawer, drawee, payee, holder, holder in due course, endorser, endorsee, drawee in the case of need and acceptor for honour. The maker or drawer initiates the instrument and the drawee is directed to make the payment. The payee is the intended recipient of the payment. Holders can be payees or those who possess the instrument through endorsement.

A holder in due course acquires the instrument before the maturity date for value and without knowledge of defects in title. Endorsers transfer their rights by endorsing the instrument and endorsee is the designated recipient. Drawee in case of need acts as an alternative payer and acceptor for honour steps in under exceptional circumstances.